. . . because much of the content relates both to Washington, D.C., and "outside the beltway" -- the heartland, specifically Iowa -- and because after going from Iowa to Washington via Texas and California I subsequently returned, From DC 2 Iowa.

Friday, February 27, 2009

How did half of our nation’s population – the half that defines itself as conservative or moderate with conservative leanings – come to believe that it was ok to lie on a mortgage application? To put together thousands of loans into securities that were so complex that the printed documentation spanned thousands of pages? To sell a mortgage to a consumer knowing full well they could not pay? To sell a security out the front door to a customer, while shorting it in the next room?

How is it that our government has become so corrupt that Stanford Financial, now accused of a massive fraud spanning more than a decade, gave $250,000 to the Republican Senatorial Campaign – and nearly a million to the Democrats? Their lobbying successfully killed a bill that might have uncovered their alleged fraud years ago – in a Senate Committee. Partly as a consequence, over $8 billion in uninsured CDs held by Americans appears to have disappeared. Someone clearly got the best government money can buy, but it certainly wasn’t us.

How did Congress look the other way while our nation’s leaders – allegedly conservatives themselves – locked senators and representatives in a room one dark September night and predicted the end of the world unless Henry Paulson was given a blank check for $700 billion dollars that this nation did not have and would have to borrow?

We have descended the economic slope to where we are today because we, as Americans and conservatives, were willing to tolerate “just one little lie” in the pursuit of profit. As we have now seen, one little lie, repeated often enough, becomes one gigantic mess.

Karl Denninger, with his "The Market Ticker: Commentary on the Capital Markets" blog, is a knowledgeable market analyst and self-professed conservative. He won an award last evening from "Accuracy in Media," AIM, which I knew of years ago when involved with media reform because AIM was then taking aim at what its leader, Reed Irvine, characterized as "the liberal media." The excerpts quoted above are from Denninger's speech to AIM last evening.

Like Denninger, I too think of myself as far more pragmatist than ideologue. There are plenty of directions in which to point fingers, and I -- and apparently Denninger as well -- think it's long past time politicians get beyond the very generous campaign contributions from their "friends" in the financial community and start doing more of that finger pointing. The diversion of focusing on the millions CEOs are spending on parties and planes is only blinding us to the trillions the politicians are continuing to give them. See, Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009._______________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Thursday, February 26, 2009

With our President talking about spending billions on "infrastructure," I thought it might be useful to bring this concept "FromDC2Iowa." But how? What might be an Iowa City-sized example of an "infrastructure" in need of repair?

And what lessons might it hold for our current global economic collapse?

Walking to town the other day, coming round and down the circular walkway across Riverside Drive to the Burlington Street bridge, I noticed some chunks of concrete and rust in a pile on the walkway.

Curious as to where it might have come from, I looked up and saw:

Apparently the steel used to hold the concrete together was beginning to rust through. Other, seemingly tiny spots showed the beginning of deterioration, presumably from deep within.

Sometimes there were what appeared to be lengthy stretches of rusting metal. Could this have anything to do with why the concrete span across the highway sort of bounces up and down when you walk on it, I wondered.

There were more missing chunks of concrete.

I'm no engineer, but I recall being told years ago that this can be a result of the salt used to melt ice on bridges in the winter -- whether pedestrian or car and truck bridges.

Our footbridge is just one little home town example of the economic challenge -- and opportunity for job creation -- confronting our nation if we were to really undertake the task of rebuilding the infrastructure (not just roads, bridges and schools, but natural gas pipelines, sewers, power lines, railroads, Internet broadband, and water lines, among other things).

We're still living with "infrastructure" built by the "CCC boys" and others during the last Great Depression 70 years ago -- indeed, some of our infrastructure is twice that age.

Somewhere along the way we lost a major part of what made America great: sacrificing and building for future generations, creating rather than just consuming. A commitment to, an investment in, future generations is what inspired the Louisiana Purchase, opened the West, spanned the continent with railroads, and later the Interstate Highway system; set aside some of our country's greatest beauty spots as national parks; built libraries, K-12 schools, land grant colleges, universities, and funded a "GI Bill" to fill them with returning veterans -- the list is endless.

We are no longer willing to share the sacrifice of war with our military: instead of pay-as-you-go financing, with citizens scrimping to buy the equivalent of the WWII "war bonds," our government grants tax breaks to our wealthiest and passes the cost to future generations; instead of rationing our president told us after 9/11 to "go shopping;" instead of a Selective Service draft, with the pain of dead sons and daughters falling on all American towns and families, we divert state and national guard members, and enrich the likes of Blackwater and Haliburton with the billions spent on for-profit, privatized war.

Instead of building family businesses over decades, we've turned a blind eye to businesses merging to a size now "too big to fail;" run by hired hands earning millions, willing to move on when more millions are offered elsewhere; whose performance is measured by three-month (quarterly) stock prices and other statistics. Why would they fix the roof this quarter when it's not going to start leaking until next quarter? Why worry about mortgages that will never be paid when bonuses are based on sales this quarter rather than bankruptcies next quarter? After all, you'll be gone four months from now.

Instead of the levels of saving of the Chinese, or even what Americans were averaging three decades ago (9%), we've spent the last ten years spending more than we earn -- a "negative" savings rate made possible (even if only temporarily) with second mortgages and credit cards.

Instead of building on the hills, and clearing the rivers' flood plains for parks, forests, prairies, and recreation areas for our own and future generations, we rebuild -- hoping and assuming that the government, somebody, anybody, will quite literally "bail us out" when the inevitable next flood occurs.

We act as if Gordon Gekko ("Wall Street" (1987)) was right: "Greed is good." Ayn Rand is our shepherd, we shall not want. Government is the problem, not the solution.

Karl Marx told us there would be days like this.** [Lest there be any question, no, I'm not advocating that "communism" would be an improvement over what we have.]

But even he did not predict crumbling walkways in Iowa City.

__________

[** I don't want to take the time to try to find passages in Das Kapital that would be both relevant and comprehensible, so here is a very quick and secondary source summary: "Marx argued that capitalism was prone to periodic crises. He suggested that over time, capitalists would invest more and more in new technologies, and less and less in labor. Since Marx believed that surplus value appropriated from labor is the source of profits, he concluded that the rate of profit would fall even as the economy grew. When the rate of profit falls below a certain point, the result would be a recession or depression in which certain sectors of the economy would collapse. Marx thought that during such a crisis the price of labor would also fall, . . .. Marx believed that increasingly severe crises would punctuate this cycle of growth, collapse, and more growth. Moreover, he believed that in the long-term this process would necessarily enrich and empower the capitalist class and impoverish the proletariat." Karl Marx, Wikipedia.]_______________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Monday, February 23, 2009

President Obama says he wants to cut the deficit in half. Jackie Calmes, "Obama Planning to Slash Deficit, Despite Stimulus Spending,"New York Times, February 21, 2009 ("After a string of costly bailout and stimulus measures, President Obama will set a goal this week to cut the annual deficit at least in half by the end of his term, administration officials said. The reduction would come in large part through Iraq troop withdrawals and higher taxes on the wealthy").

He's called a meeting today to start the process. Michael Falcone, "The Early Word: Budget Week,"New York Times, February 23, 2009 ("At a mini-summit today, President Obama and an invited group of lawmakers and advisers will be discussing how to shrink the federal deficit and possibly how to reform some of the largest government programs, including Social Security and Medicare").

That's good. But cutting that baby in half is not enough. For starters, the public needs to understand the difference between "deficit," "debt," and "unfunded obligations."

President Bush started his eight years with a President Clinton-created surplus and ended with a half-trillion-dollar deficit he handed off to Obama. Roger Runningen, "U.S. Deficit to Reach Record $490 Billion in 2009," Bloomberg, July 28, 2008 ("The projected deficit for the fiscal year that begins Oct. 1 [$490 billion] is higher than the $407 billion forecast by President George W. Bush in February. . . . Bush inherited a budget surplus of $128 billion when he took office in 2001").

That will increase our current "debt," which is in excess of ten times that. (Once it went over $10 trillion, the National Debt Clock actually ran out of numbers. Frank Ahrens, "Debt Clock Out of Numbers,"Washington Post, October 8, 2008. zFacts.com reports that "We hit a 53-year high for debt as a percent of the economy (GDP).")

As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.

The total U.S. obligations, including Social Security and Medicare benefits to be paid in the future, effectively have placed the U.S. government in bankruptcy, even before new continuing social welfare obligations embedded in the massive spending plan are taken into account.

The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.

In other words, cutting the deficit in half means we're going to continue to add to the government's debt each year at least $500 billion -- if Obama is successful, and of course more if he's not.

A story later in the day hit on many of the above issues. David Stout, "Obama Vows to Slash Federal Deficit,"New York Times, February 23, 2009 ("The president promised, as expected, to halve the deficit that he inherited, estimated at $1.3 trillion or more for 2009, by the end of his first term . . .. The deficit is the year-by-year gap between what the federal government spends and the revenue it takes in. So even if the annual deficits are cut, the total national debt will continue to grow. It now stands at just over $10.8 trillion, according to the Department of the Treasury").

No less an Obama predecessor and American hero than George Washington once encouraged his countrymen to exercise "vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear." (The full passage is quoted and linked below.)

(Around the Internet this quote is often attributed to a 1789 letter from Washington to James Madison as "No generation has a right to contract debts greater than can be paid off during the course of its own existence." See, e.g., Joan C. Browning, "Spending Our Grandchildren's Money," February 2, 2008. But I have been unable to find any more precise reference to the source, let alone a link, to confirm it. It is not even included in Wikipedia's rather lengthy collection of Washington quotes. This may be in part a confusion with the first "Farewell Address" of 1792, following which Washington served another term, a draft with which James Madison is said to have assisted. Obviously, if you know of an authoritative online source for the "quote from the letter" please enter it as a comment to this blog entry.

Feb. 24, 5:10 p.m.: The mystery is solved. It was not a letter from Washington; the letter was written by Thomas Jefferson. And having done the research, to save others going through the same lengthy process, here are a couple of hard copy cites and a link as my modest daily contribution to academic scholarship and my "let's please provide sources for our Internet postings" campaign.

Thomas Jefferson, The Earth Belongs in Usufruct to the Living, II. Thomas Jefferson to James Madison, Paris, 6 September 1789, in Julian P. Boyd and William H. Gaines, eds., The Papers of Thomas Jefferson, 27 March 1789 to 30 November 1789 (Princeton: Princeton University Press, 1958), vol. 15, pp. 392, 393.

The quotation ["no generation can contract debts greater than may be paid during the course of its own existence"] is contained within a lengthy and very thoughtful essay on the subject, well worth our reading and contemplating today. A link to a brief excerpt from the essay, including this quote, is available at "The Limits on Contracting Debt" in 38. The National Debt, Thomas Jefferson on Politics & Government, Jefferson Quotations, University of Virginia.)

As is so often the case, our editorial cartoonists are often much more able to make the argument with the point of a pen:

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear. The execution of these maxims belongs to your representatives, but it is necessary that public opinion should co-operate. To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.

Needless to say, I'm going to be very interested to see what comes out of today's White House meeting. My three great grandchildren are asking me how much debt our generation is going to be leaving to them.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

G.M., the nation’s largest automaker, . . . is assuming it will be able to pull off a remarkable turnaround if gets the additional loans.

In its restructuring plan filed Tuesday [Feb. 17] with the Treasury Department, G.M. projects it will end 2009 with a $14 billion cash shortfall, but then improve to a $6.6 billion surplus by 2012.

That would be a swing of more than $20 billion, and whether G.M., which last earned a profit in 2004, can realistically achieve it is among the biggest questions for the Obama administration as it reviews the company’s latest loan request.

G.M. has received $13.4 billion in loans since late December . . .. Most of the new loan money that G.M. requested would be used to cover its continuing losses. The company has been losing roughly $2 billion a month since last fall.

Frankly, I see nothing that has happened during the last three months, or that GM is now proposing, that leaves GM's request for more funds as anything other than even less compelling than it was last November and December.

I don't see the business plan that explains how $30 billion more from taxpayers -- essentially $300 from every family in America -- is going to recreate the profitable and vibrant GM of old.

And I sure don't see how a proposal that includes laying off 47,000 workers and closing 14 plants can be characterized as either "a jobs program" or a part of a stimulus to our economy. ("G.M. contends that . . . losses will shrink . . . because of savings from cutting 47,000 jobs worldwide and shutting 14 plants in North America." Ibid.)

After all, GM's problem is not that there aren't enough GM cars in dealers' showrooms -- or that there could not quickly be. The problem is that those vehicles are not selling -- and that there is nothing in its proposal designed to increase sales. ("United States vehicle sales this year are at their lowest point in more than 25 years, and many industry analysts do not share G.M.’s optimism for a recovery by 2012." Id.)

Nor is this just my opinion: "in a scathing review of the restructuring plans submitted by G.M. and Chrysler, Moody’s said there was a '70 percent' probability that one or both of the companies [i.e., Chrysler as well as GM] would have to file for bankruptcy protection." Id.

Giving more taxpayer money to "the automobile industry" -- meaning GM -- primarily benefits its shareholders and handsomely paid top executives. It doesn't put money in the pockets of potential car buyers. And it essentially turns its back on the UAW members who, as a potential part of the consumer spending that is 70% of our GDP, could actually do something to boost the economy.

Insofar as those auto industry suppliers and their workers are concerned, their welfare turns on vehicle manufacture and sales -- which the GM bailout does nothing to improve. There is still an automobile market in the U.S. -- albeit substantially less (10 million vs. 13 million cars a year) than it used to be. The cars that will continue to be manufactured to satisfy that market, whether Fords or Toyotas, will continue to need parts -- all the parts for which the U.S. auto industry has a need (with or without GM). Will those suppliers take a hit? Absolutely. But it shouldn't be much greater without a GM than with it.

Here are links to eight of the blog entries from last November and December that explore some of these issues in greater depth. Almost all of them seem equally applicable today, if not more so.

__________

Nicholas Johnson, "Why America Needs a Jobs Program: Because When Your Auitomobile (Industry) is in the River It Makes More Sense to Go For the Shore Than to Continue Bailing it Out," in "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Tuesday, February 17, 2009

Financial Crises for Dummies:An Open Letter to Secretary Geithner and Congress(brought to you by FromDC2Iowa.blogspot.com*)

[This parable showed up in my email this morning. The author is unknown. (Given the Berlin setting it may have originated in Germany.) In any event, it's as good an explanation of how we got into this mess as I've seen.

It's also a warning to Washington that "we know what you're up to."

My solution?

1. Kill the zombie banks before they strike again; shareholders take a bath, FDIC protects depositors.

2. Let investors, not taxpayers, evaluate the value of, and buy, "toxic assets" (what an oxymoron that is!) with no government guarantees.

3. Temporarily nationalize any banks that believe they need taxpayer funds, buying their stock at current market value.

4. Break up those "too big to fail" (any bank "too big to fail" is simply too big, and too inclined to take risks likely to fail).

5. Fire the top executives (after getting back from them as much of their ill-gotten gains as possible), and then prosecute and imprison those guilty of violating any laws.

6. Distribute the assets to community banks.

7. Re-enact Glass-Steagall. (This is the 1933 Act of Congress that, among other things, prohibited bank holding companies from owning other financial companies. Its repeal, by the Gramm-Leach-Bliley Act of 1999 was a major cause of the current economic collapse.)

Why do these things? This parable explains why:]

__________

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfil her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non-drinkers.

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Friday, February 13, 2009

After eight years of hunting, America's top intelligence and law enforcement agencies have finally found the most deadly terrorists threatening our nation's national security.

Who are they?

Bankers.

I'm not kidding. Read on.

There's been an almost "boys will be boys" reaction in Washington to the destruction of the American economy by those very generous campaign contributors who call themselves "masters of the universe." Few have been removed from power or had their pay cut, none (to my knowledge) has been required to pay back any of their past obscenely large and ill-gotten gains, and a statistically insignificant number have even apologized for the harm they've caused -- let alone been prosecuted and sent to prison.

There are undoubtedly "a few good apples" somewhere in that rotten barrel, but they are few and far between.

For the most part, those whose incompetence, irresponsibility, immorality, criminality and greed have created widespread hardship on the American people (and much of the rest of the world) have been very slow to "get it." "Why do they hate us?" they seem to be asking from the comforts of their $1 million redecorated offices, $50 million private jets, and posh resort retreats.

Well, now that "public anger" has become a political force of some consequence at least some of our elected officials (to whom these guys must come for more trillions of our taxpayer dollars) are trying to explain it to some of their most generous contributors.

"'Alleviating that public anger, not with mumbo jumbo but with reality, is essential if we’re going to have the support of the country,' House Financial Services Committee Chairman Barney Frank said today at a hearing in Washington," speaking to eight CEOs of some of the nation's largest banks. Alison Vekshin, "Congress Tells Bank Chiefs to Lend, Ease Public Anger," Bloomberg, February 11, 2009.

At long last we may now have even more basis for our "public anger" and a sense of accomplishment for expressing it.

No more "boys will be boys."

Dennis C. Blair, our new intelligence czar (Director of National Intelligence), speaking for the federal government's "intelligence community" has just told the Senate Intelligence Committee that the wreckage caused by our nation's irresponsible, selfish CEOs has now "outpaced terrorism as the most urgent threat facing the United States" (excerpts from the Times' February 13 story below).

Apparently the FBI agrees. "With thousands of [corporate and "an even bigger mountain of" mortgage] fraud investigations under way [including "some of the biggest names in corporate finance"], the FBI is considering shifting agents away from counterterrorism work to help sort through the wreckage of the financial meltdown. . . ." (more excerpts from the Bloomberg report below).

Perhaps our elected officials -- who quickly spring to action with trillions for the nation's bankers, but tell us it will be "a few weeks" before they will be able to focus on the human carnage those bankers have caused among the officials' constituents -- will be willing to give a little more attention to prosecuting these terrorists and criminals among us, normally very handy and popular targets for politicians, now that they have been identified as such by the intelligence and crime fighting agencies of our government.

The new director of national intelligence told Congress on Thursday that global economic turmoil and the instability it could ignite had outpaced terrorism as the most urgent threat facing the United States.

The assessment underscored concern inside America’s intelligence agencies not only about the fallout from the economic crisis around the globe, but also about long-term harm to America’s reputation. The crisis that began in American markets has already “increased questioning of U.S. stewardship of the global economy,” the intelligence chief, Dennis C. Blair, said in prepared testimony.

Mr. Blair’s comments were particularly striking because they were delivered as part of a threat assessment to Congress that has customarily focused on issues like terrorism and nuclear proliferation. Mr. Blair singled out the economic downturn as “the primary near-term security concern” for the country, and he warned that if it continued to spread and deepen, it would contribute to unrest and imperil some governments.

“The longer it takes for the recovery to begin, the greater the likelihood of serious damage to U.S. strategic interests,” he said. . . .

Mr. Blair delivered his assessment to the Senate Intelligence Committee, in what was the new administration’s first public recitation of the national security challenges facing the United States. . . .

Mr. Blair’s focus on the world economy was a surprise to some senators. . . ."

With thousands of fraud investigations under way, the FBI is considering shifting agents away from counterterrorism work to help sort through the wreckage of the financial meltdown. . . .

[FBI Deputy Director John] Pistole told Congress his investigators have 530 active corporate fraud investigations, and 38 of them involve some of the biggest names in corporate finance — cases directly related to the current crisis.

In addition, FBI investigators are tackling an even bigger mountain of mortgage fraud cases in which hundreds of millions of dollars may have been swindled . . . more than double the number of such cases just two years ago . . . industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars . . . 'lawyers, brokers or real estate professionals . . . systematically trying to defraud the system,' Pistole said . . . [including] some instances of organized crime getting involved in mortgage fraud . . ..

"If You Can't Trust Your Banker . . ."

[Credit: "Shady Deal at Sunny Acres," Maverick, 2nd Season, 1958. The popular early television series, Maverick, "starring James Garner and Jack Kelly, remains the most famous and widely discussed episode of the Western comedy television series Maverick. Written by Roy Huggins and Douglas Heyes and directed by Leslie H. Martinson, this 1958 second season episode depicts gambler Bret Maverick (James Garner) being swindled by a crooked banker (John Dehner) after depositing the proceeds from a late-night poker game, then recruiting his brother Bart Maverick (Jack Kelly) to mount an elaborate sting operation to recover the money." It's also the source of two oft-quoted lines: "If you can't trust your banker, whom can you trust?" and "I'm working on it." See, "Shady Deal at Sunny Acres," wikipedia.org.]

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Tuesday, February 10, 2009

As I listened to Treasury Secretary Tim Geithner explain his "Financial Stability Plan" the line that kept running through my head was "Meet the new boss -- same as the old boss!" from The Who's "Won't Get Fooled Again" (lyrics from "Folk and Traditional Song Lyrics" -- the line is about 7:50 into this YouTube video):

Geithner's plan strikes me as what the Bush Administration Treasury Secretary Paulson's plan might sound like after you had run it through a public relations firm.

[And see: "Even before the revelation of his tax delinquency, the new Treasury secretary was a dubious choice to make this pitch. Geithner was present at the creation of the first, ineffectual and opaque bank bailout — TARP, today the most radioactive acronym in American politics. Now the double standard that allowed him to wriggle out of his tax mess is a metaphor for the double standard of the policy he must sell: Most “ordinary Americans” still don’t understand why banks got billions while nothing was done (and still isn’t being done) to bail out those who lost their homes, jobs and retirement savings. . . . [T]he political problems caused by Geithner’s tax infraction are secondary to the larger questions raised by his past interaction with the corporations now under his purview. . . . [H]e still has not satisfactorily explained why, as president of the New York Fed, he failed in his oversight of the teetering Wall Street institutions. Nor has he told us why . . . he secured a waiver from Obama to hire a Goldman Sachs lobbyist as his chief of staff . . . [or]why Lehman Brothers was allowed to fail while A.I.G. and Citigroup were spared." Frank Rich, "Slumdogs Unite!"New York Times, February 7, 2009.]

Geithner didn't sell me, and judging by the near-5% drop in the S&P 500 following his presentation he didn't sell the financial community either -- though I rather suspect for different reasons.

["Stock prices fell sharply on Tuesday after Treasury Secretary Timothy F. Geithner unveiled the government’s latest efforts address the troubled banking system, a plan whose price tag could reach $2 trillion in money from the Treasury, Federal Reserve and private sector. . . . Despite the size and scope of the Obama administration’s plans, investors said Mr. Geithner’s proposal raised more questions than it answered. The way out of the financial crisis, analysts said, looked as murky as ever." Jack Healy, "Stocks Slide as New Bailout Disappoints," Reuters/New York Times, February 10, 2009.]

Tell me why (to use some hypothetical numbers), if you could buy an entire bank, buy up all its stock at market prices, for say, $15 billion, why would you make the executives who brought it to near bankruptcy a gift from the U.S. Treasury of $25 billion (by buying its "toxic assets") and then have the Federal Reserve "loan" it an additional $50 billion? (In November 2008 the government agreed to cover up to $306 billion worth of Citigroup losses. See editorial immediately below.

And please note that U.S. taxpayers' dollars at risk are currently approaching $10 trillion dollars! Mark Pittman and Bob Ivy, "U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs," Bloomberg.com, February 9, 2009 ("Senator Byron Dorgan . . . said on the Senate floor Feb. 3, 'Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?' . . . The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.")

["[I]n a few months last year, the government overpaid for banks’ troubled assets by some $78 billion — a redistribution, in effect, of taxpayer dollars to the banks and their shareholders. And for what? The system . . . has since edged up to the abyss again. . . . Putting taxpayers first means that in exchange for shoring up the banks, the government must receive ownership stakes . . .; de facto, taxpayers would own the bank. . . . Contrary to stereotype, in countries that have successfully weathered serious bank crises, including the United States, such a takeover is preferable to leaving firms in the hands of those who have so badly mismanaged them." Editorial, "Bank Bailout, Redux,"New York Times, February 7, 2009.]

Ah, you say, temporary nationalization won't work because the government can't run banks. Putting aside the fact that governments have done so in other countries, if our government can't run banks then I guess there's no one in this country who can. Because the only folks who have removed all doubt as to their inability to run banks are those in the private sector who have been running them into the ground.

Geithner apparently did sell President Obama -- who cannot now dodge the fact that this is his plan. The Times reports this morning that its elements emerged following "a spirited internal debate," a debate that Geithner won and David Axelrod and others lost -- a debate that we must assume could only have been judged by Obama, who has proclaimed himself as being, to borrow Bush's self-characterization, "the decider." Stephen Labaton and Edmund L. Andrews, "Geithner Details New Bank Rescue Plan,"New York Times, February 10, 2009.

Even Geithner acknowledged, "I want to be candid: this comprehensive strategy will cost money, involve risk, and take time. . . . We will have to adapt it as conditions change. We will have to try things we’ve never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted." (The full text of his presentation is available as "Remarks of Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan," February 10, 2009.)

The Times' story continues:

Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that . . . the administration did not demand enough sacrifices from the companies that receive federal money. . . .

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod . . ..

Officials . . . expect to return to Congress for more money later this year. . . .

The $500,000 pay cap for executives at companies receiving assistance . . . applies only to very senior executives. Some officials argued for caps that applied to every employee at institutions that received taxpayer money.

Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment. Some officials had suggested that the next bailout phase not protect existing shareholders. . . .

Nor is the government announcing any plans to replace the management of virtually any of the troubled institutions, despite arguments by some to oust current management at the most troubled banks.

Finally, . . . the administration . . . will not dictate to the banks how they should spend the billions of dollars in new government money.

And for all of its boldness, the plan largely repeats the Bush administration’s approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis and failed to foresee many of the problems plaguing the markets.

There you have it: what Geithner himself acknowledges is a costly, risky plan taking us to times when things will get worse, with mistakes along the way.

It is a plan that gives trillions of taxpayers' money to the same guys who created the problem, who have shown themselves to be ethically and intellectually incapable of solving it, and it does this without replacing any of them, with no restraint on what they do with the money, little or no loss to their shareholders, no requirement that they make loans, and no limit on what most of them can be paid with our money or how much of it goes to private jets and office redecoration -- and as an afterthought less than 5% that may someday be devoted to helping those facing mortgage foreclosure.

In short, this proposed giveaway to the banking and investment industries is -- like the Obama Administration's recent adoption of the Bush approach to rendition and torture -- a plan that, as the Times says, "largely repeats the Bush administration’s approach." [See, e.g., "Justice Department Stands Behind Bush Secrecy in Extraordinary Rendition Case," ACLU, February 9, 2009 ("The Justice Department today repeated Bush administration claims of 'state secrets' in a lawsuit against Boeing subsidiary Jeppesen DataPlan for its role in the extraordinary rendition program").]

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009_______________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Saturday, February 07, 2009

There's even more reason this morning [Feb. 7] to make the economic recovery case I've been urging in these blog entries ever since the potential consequences of our downturn became obvious to all.

In a failing economy, 70% of which depends upon consumer spending, once the government decides to infuse trillions of dollars into the economy the first place to put it is in the pockets of those who will spend it: the jobless.

Adequate and additional funding for the unemployed does not require the creation of new programs (they're already in existence), can distribute the money faster than almost any other way, provides money to those most likely to spend it (rather than invest it), and to spend it almost immediately (rather than months from now), with a multiplier effect of roughly 1.7 in economic impact (compared to 0.27 for tax cuts), in the single largest economic sector (consumer spending).

And for those who look at economic recovery issues from a moral, ethical, humanist, communitarian, sociological or religious perspective, clearly those who are down on their luck through no fault of their own are the ones most deserving of our government's assistance. The point is, even if these considerations are ignored, and one just looks at the numbers like a steely-eyed banker, caring for the jobless is also the most cost-effective way out of the hole we're in.

o Half or more Of the 11.6 million currently jobless Americans aren't covered.

o Some earned too little to qualify -- in part because of how their earnings are calculated.

o Part-time workers aren't covered.

o Benefits run out (after, say, 26 weeks) long before new jobs appear, since the program was designed for those "between jobs" during brief recession dips not the massive, continuing joblessness of a major global depression.

o The programs are funded by employers, now contributing less.

o They are administered as state, rather than federal, programs; states are running out of money, and under-staffed to handle the rapid increase in applications.

Here are some excerpts from Rugaber's story:

The government safety net designed to protect laid-off workers from financial catastrophe is falling short, leaving nearly half the 11.6 million jobless Americans without unemployment benefits.

The shortcomings are fueling the recession as an increasing number of workers fall through the cracks and curtail spending. The trend highlights what economists say is a growing need for a 21st century makeover of a program started in the depths of the Great Depression.

Among the key problem areas:

-- There are many more part-time workers now than in 1935, but the program only covers those looking for full-time work.

-- Many eligible jobless Americans are shut out because states use an outdated system for calculating their income, making it more difficult to meet requirements.

But more fundamental reforms are needed to address the system's underlying weaknesses, several economists said.

Many of the 5.2 million unemployed Americans without jobless benefits already ran through their 26 weeks of assistance. The program, funded by states through taxes levied on employers, has been no match for a recession that is frustrating the ambitions of even the most qualified job hunters.

That is forcing families to cut back on spending and dip into savings, if they have any. . . .

Gus Faucher, director of macroeconomics at Moody's Economy.com, said if the government provided benefits to more workers, it would reduce the severity of the recession. . . .

Before the emergency extensions, only about one-third of unemployed Americans were receiving benefits, a level that has declined steadily since coverage was at its peak in 1975.

The proportion of workers covered usually increases during recessions as Congress typically enacts extended benefits. Some experts argue that extensions should be automatic during downturns to avoid politicizing them. . . .

High demand -- and insufficient funding -- has made it difficult for many unemployment offices to keep up. Last month, online systems for requesting benefits in three states crashed under the crush of claimants. . . .

At least a half-dozen states have had to borrow money from the federal government to pay benefits after exhausting their unemployment insurance trust funds. . . .

In decades past, layoffs during recessions were often short-lived and workers were eventually rehired by the same company. Today, companies are more likely to eliminate jobs for good, either by shutting down plants or moving them abroad, according to a study by the Brookings Institution.

The result: Unemployment spells tend to be longer . . ..

Many states don't count workers' most recent 3 to 6 months of wages . . . [S]hortchang[ing] low-income workers, who may not be able to prove they earned the minimum required for benefits. . . .

In 21 states that have begun calculating eligibility using up-to-date wages, roughly 40 percent of those who initially didn't qualify were able to do so . . ..

Jeffrey Kling, an economist at the Brookings Institution, says . . . the government should temporarily replace part of the income workers lose when they take lower-paying jobs after a layoff.

The stimulus package provides some little nods in the direction of the jobless, but is a far cry from solutions. Once these problems are fixed, once all of the jobless are offered financial support, job training and job opportunities, once we've at least begun to expand for them the immediate relief of health care and ways to hang onto their homes, then and only then should we be considering any additional hundreds of billions for bankers.

Presumably, the Republicans in the House and Senate will support me on this. After all, their objections to some elements of the Obama stimulus package were that they didn't think they would create jobs, that any impact on economic stimulus would be too far in the future, or that they had nothing to do with stimulating the economy, and that taken together they involved far too much total money.

Surely those concerns are all equally applicable to the additional hundreds of billions Treasury Secretary Geithner is about to propose for his banking friends. Those billions not only won't create jobs, they will not even require the banks to make loans! And given the $2.4 trillion the Fed has already provided the banks, and the $350 billion in TARP funds, the amounts Geithner is talking about far, far exceed anything ever considered for the jobless, or for jobs programs.

Stephen Labaton, "New Plan to Help Banks Sell Bad Assets,"New York Times, February 7, 2009 ("[T]he Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks . . . [that] will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks. . . . The goal is to relieve the banks of their worst assets . . ..")

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

Thursday, February 05, 2009

There are at least two things wrong with the President Obama-Secretary Geithner plan to limit executive compensation.

It's a relatively superficial and unsuccessful public relations effort to put lipstick on the Wall Street pigs that fails to turn them into hockey moms.

It's a diversionary tactic to take the public's eye off the ball. So what's the real problem? The real problem is not the $18 billion in undeserved bonuses, it's not the $50 million private jet plane. So what is it? It's the now some $2.5 trillion the Fed has given these guys (but refuses to tell the public and media about), plus the $350 billion we gave them with no strings attached that produced no measurable benefit for the country's taxpayers, plus the New York Times report that "the administration is expected to unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets held by banks" (presumably on top of the $350 billion Congress has already appropriated for this purpose).

Even if executive compensation and other personal excesses were 99% of the problem, instead of 1%, what Obama and Geithner have proposed (so far) is little more than a collection of loosely woven loopholes.

The Times also reports:

Past administrations have also been critical of excessive pay, but corporate executives have found ingenious ways around limits, often hiring consultants to create new forms of compensation. . . .

In 2007, the latest year that figures are available, the largest participants in the bailout program paid their chief executives an average compensation of $11 million, including salary, bonus and benefits. Of that amount, according to a review by Equilar, an executive compensation firm, only about $844,000 was cash salary. About $2.5 million was in a cash bonus, with the bulk — $7.4 million — in stock awards, and the remainder in benefits and perks. . . .

But wait, it gets worse as the Times story continues. Corporate executives won't have to "find ingenious ways around these limits." Geithner has kindly written those ingenious ways into the very rules to be applied to his friends and former colleagues. Just look at these loopholes -- which I've excerpted and numbered 1 through 12:

President Obama . . . needs to deflect a growing populist outrage over sky-high pay among the banks and other companies now on the public dole. His announcement comes just days before the administration is expected to unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets held by banks.

The new rules would set a $500,000 cap on cash compensation for the most senior executives, curtail severance pay when top executives left a company, restrict cashing in on stock incentives until government assistance was repaid and prod corporate boards to closely scrutinize luxury perquisites like private jets and country club memberships. . . .

Past administrations have also been critical of excessive pay, but corporate executives have found ingenious ways around limits, often hiring consultants to create new forms of compensation.

Even the new rules allow companies some leeway.

(1) While giving shareholders a say in bonuses above the cap and restricting when stock incentives can be cashed in, the rules do not place limits on the size of such awards, which have become the biggest part of many compensation packages.

(2) [T]he toughest new rules apply only to large companies seeking government assistance to survive.

(3) They do not apply to the more than 350 institutions that have already received bailout funds, only to those that seek aid under the next phase of the bailout program.

(4) [C]ompanies that seek aid but do not need exceptional government assistance can waive the $500,000 pay cap, as long as they submit their executive pay policies to a nonbinding shareholder vote. . . .

(5) If banks return to the government for more money, the new rules would require a reduction in pay, but not in stock awards . . ..

(6) The rules would not prohibit a lower-level executive, like a stock trader or investment banker, from continuing to receive tens of millions of dollars in pay.

(7) Officials also emphasized that several of the proposals would not be made final until after public comments had been considered.

(8) During the Bush administration, the Securities and Exchange Commission adopted new rules promoting better public disclosure of executive compensation . . . but none of that put a significant dent in executive pay. A recent study by Equilar, a compensation research firm, found that the chief executives of the 10 largest financial services firms in a survey of 200 companies with revenue of at least $6.5 billion were awarded a total of $320 million last year, even though the companies had mortgage-related losses of $55 billion.

(9) The plan does not limit the size of bonuses that can take the form of restricted stock above the $500,000 cap — though companies would have to give shareholders a nonbinding vote on such awards. Indeed, troubled financial institutions are already giving executives significant sums of restricted stock . . . in some cases . . . making up 60 percent of executives’ total compensation.

(10) The plan does not appear to prohibit a financial institution from sponsoring a major golf tournament . . ..

(11) At a White House briefing, senior officials repeatedly declined to answer whether the plan would prohibit a company like Citigroup from paying $400 million to have its name on a baseball stadium.

(12) It is also unclear whether lucrative pension plans would be banned.

So far as I'm concerned, before we even think about loading any more trillions of cash on bank executives, and debt on my great-grandchildren, I want three things:

1. Some benefit to flow from the current "stimulus package" or other programs to those Americans who aren't paid millions of dollars a year and who don't fly around in their own private jets -- adequate appropriations for and distribution of food stamps, unemployment compensation, healthcare, and jobs.

2. A full and transparent report of what was done with the first $350 billion for bankers and $2.5 trillion in loans from the Federal Reserve -- who got it, what did they do with it, what did the taxpayers get in return, and what perks and benefits were paid to the recipients' top executives while this was going on.

3. Something resembling the kind of business plan and assurances a small town banker would want to see before loaning $50,000 to a new start-up business. Who will this new money be going to? What do we predict the recipients will do with it and why? How and why will that help the economy for the rest of us? What enforceable, meaningful conditions will be written into the grant/loan to make sure that happens? What will be the cost/return to taxpayers? How does "buying up toxic assets" differ from "a gift"? What is the "exit strategy" -- that is, what are the mileposts, what is the likelihood additional multi-billion-dollar "loans" (gifts) will be required in the future? Why will the oversight/transparency be adequate/effective? What is the rationale/historical precedent/theory as to why this program will correct our economic ills? What is the worst case scenario regarding the impact of this massive debt on a future runaway inflation or other adverse consequences?

Those are some of the things I'm going to be looking for next week when Obama-Geithner "unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets."

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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